Bad Loans Continue to Increase in China

For the fifth time in a row, Chinese banks showed an increase in bad loans and non-performing credits in the last quarter assessment of 2012.

Economic experts said it has been the longest deterioration streak in the history of China banking, which could be a cue for companies offering bad credit loans to start business in China.

According to the China Banking Regulatory Commission (CBRC), the last three months of 2012 recorded at least 492.2 billion yuans or overdue loans, an increase of 14.1 billion yuans or USD2.3 billion from the records of the preceding quarter.

Mid-sized lenders and rural banks declared the highest percentage of bad loans in China.

Collapse in Private Lending

Eastern Chinese city of Wenzhou, which was hit the hardest by the collapse of private lending in 2012, declared a 23.86-billion yuan bad loans from only 8.6 billion yuans of bad loans in 2011. The case has been elevated to higher authorities where the city assigned 100 judges to resolve the debts with lenders.

The Industrial & Commercial Bank of China (601398) Ltd., the world’s largest bank by market value, was apparently also affected as its shares fell by 0.4 percent in Hong Kong during the first week of March. Shares of China Construction Bank Corp. (939), also one of the largest banks, fell by 0.3 percent.

The continuous increase of bad loans is attributed to the slow movement of the world’s second-largest economy. China’s economy has been slow in the last 13 years.

The net interest margin of banks were down to 2.75 percent from 2.77 percent in the preceding quarter, an indication that interest earning assets of banks are being outperformed by their non-performing assets.

Non-performing loans comprise 0.95 percent of the Chinese banks’ total advances as of December, reports said.

No Threats from Bad Loans

Despite the continuous increase of bad loans though, some optimists insist there is no significant threat to the China banking system.

Although bad loans increased last year, the non-performing credits ratio remain at a lower level.

Chinese banks released the highest loans in January amounting to 1.07 trillion yuans. Experts said that these new loans might help the banks cope with the losses and keep the non-performing loans ratio at a manageable level.

Chinese commercial banks’ combined loans also rose to 1.24 trillion yuan or USD197.5 billion last year, and increase of 18.9 percent compared to 2011. The growth rate, however is lower compared to 2011’s 36.4 percent increase rate from 2010.

Another indication that banks are not in any risk is its increasing capital adequacy ratio, which rose to 13.3 percent at the end of 2012 from only 12.7 percent in 2011.

The CBRC only requires the banks or major lenders to maintain a minimum capital adequacy ratio of 11.5 percent. The higher the capital adequacy ratio, the more capable banks become to recover as it has more cash to cover the cost of unanticipated risks. But maintaining a high ratio can also mean reduced profits so banks are advised to keep it at the recommended level.